What can we say about the outcome of the GAS (Great Annual Savings Company Limited) sanction hearing that hasn’t already been reported?
It’s impossible not to comment on the fact that the plan was not sanctioned, and as a consequence of fierce opposition from HMRC that it avoided cram-down. Nor that the court refused to sanction the plan on the basis that the conditions for cram down were not met – the court was not satisfied that HMRC would be better off under the plan and even if it were the judge said he would have not exercised his discretion to cram down.
Our previous blog sets out the detail about the arguments made by HMRC in opposition to the plan. In this blog we look at some of those arguments and the key takeaways for future plans.
Valuation Concerns – do you need your own opposing expert report?
In order for the court to exercise its cross-class cram down power, one of the conditions that needs to be satisfied is that the dissenting creditor is no worse off under the plan. In GAS, HMRC said what it stood to gain under the proposed plan, versus what it would recover in the relevant alternative (administration) was marginal. Essentially, it wouldn’t take much for HMRC to be better off in the alternative if the figures in the valuation were even slightly wrong.
HMRC criticised the supporting evidence but did not produce its own expert valuation in opposition. As such the company argued that the company’s evidence should be preferred, relying on Smile Telecom where Snowden LJ had commented that any creditor wishing to oppose a plan based on the contention the valuation was wrong, should file its own expert evidence.
The judge in GAS was not persuaded that Snowdon LJ had laid down a rule that the court is bound to accept the company’s valuation if an opposing creditor does not file their own expert evidence. He said that one of the important functions of the court was to scrutinise the proposals and that included scrutinising the valuation.
What this means is that dissenting creditors may not need to go to the cost of obtaining their own expert report – they can, and may need to, but it may not be required in all cases. It is open to dissenting creditors to criticise and seek to undermine the evidence without having an opposing report.
In GAS having scrutinised the evidence the judge was not persuaded that it was robust and therefore determined that the company had been unable to satisfy the “no worse off test”.
Considerations when it comes to valuation
Some of the criticisms in GAS were levelled at the lack of independent analysis or assessment of information provided by the company, with most information being provided by the company and relied on as “factually accurate”.
In particular, criticism was aimed at the assessment of book debt realisations which under the plan were valued at £18.2m but which were effectively written off in the relevant alternative – on a best case it was estimated they would return £509k but zero in the worst case.
Given the position taken by HMRC – that the outcome for HMRC under the plan was marginal and much depended on the valuation evidence – it is clear that valuation evidence is, and was in this case, critical.
For those preparing reports the case is a reminder to carry out a robust audit of information provided by the company in order to support the analysis of the relevant alternative and make it clear in the report that that has been done.
Where the difference between the returns under the plan and those in the relevant alternative is marginal the reliability of the valuation evidence will be critical and must stand up to scrutiny.
Certainly, if there are manifest errors, inconsistencies or matters which are not properly explained the company will likely find it difficult to persuade a judge that a creditor is no worse off.
It is also worth noting that in GAS the company sought to argue that HMRC would benefit from the plan because as a consequence of the continued trading of the company it would benefit from future tax payments. The judge dismissed that the company’s obligation to pay future tax should be taken into account when applying the no worse off test because those obligations did not arise under the plan. The obligation to pay tax arises under the tax legislation and is not offered as part of the rights available under the plan.
Do you need to take account of third-party claims in the relevant alternative?
HMRC argued that when considering the relevant alternative, potential claims such as wrongful trading, preference, director disqualification compensation payments, claims for misfeasance etc should be taken into account as potential returns in the alternative process. This is not a new argument, and we have seen it in other cases.
Having already decided that the “no worse off” test had not been satisfied the judge did not have to decide what value should be attributed to such claims – but he did not say that they should not be taken into account at all, in fact he recognised that it is difficult to place a value on such claims. So, if you do have to take them into account how do you/should you value those?
It is certainty difficult to see how a proper value can be attributed unless a claim is certain, but even then, litigation and recovery risk needs to be accounted for.
For future plans, we think that these types of claims ought to be considered, but it will be necessary to do so on a case-by-case basis. However, determining what if any value, can be attributed to them will challenging given that at the point of proposing a plan there is very limited time to assess the merits of such claims.
How do you assess fairness and decide how to distribute the restructuring surplus?
Because the conditions for cram down were not met, the judge did not have to decide whether he should use his discretion to cram down – but he did provide some useful pointers on fairness. When considering whether a plan is fair it is helpful to consider:
What are the existing rights of creditors and how are they treated in the relevant alternative?
What additional contributions are creditors/members expected to make to make the plan a success i.e. are they taking additional risk by making new money available?
If a creditor is disadvantaged – is that differential treatment justified?
In the case of GAS, no new monies were being injected into the plan, instead, and in order to build a “solid platform for future growth” the majority of the company’s legacy tax debts were to be eradicated and other debts deferred to improve pressure on cash flow.
Essentially the future of the company depended on legacy tax debts being written off and payments to unsecured creditors being prioritised. The secured creditor, connected creditors and members would benefit, but primarily at the expense of HMRC as such the judge decided that the way in which the benefits of any value in the business in the future would be distributed would have been unfair and it was not justified.
What can we learn about cramming down HMRC?
HMRC was concerned about the possibility of companies using plans to eradicated Crown debt. In light of GAS, it would seem that using a plan solely for that purpose is now off the table.
HMRC is a major creditor in most cases and ensuring that they are engaged and that they are treated fairly on future plans will be key. Looking at how the restructuring surplus is generated and then shared amongst creditors and members – with perhaps a larger share being paid to HMRC to recognise that in an alternative process it would be paid more as a preferential creditor – will be an essential consideration if a company needs a court to cram down HMRC as part of its proposed plan.
HMRC do not have a published policy about their approach to restructuring plans, as they do for company voluntary arrangements. It would certainly help the industry if there was clear guidance setting out what HMRC expect from a restructuring plan in order for HMRC to support it. This will help plan proponents establish at an early stage whether a restructuring plan is likely to gain HMRC support and also avoid the significant costs of dealing with a contested sanction hearing.